Buying Stocks Now- Throwing Good Money After Bad or Smart Investing?

Posted February 26, 2009 by Bernz

It’s now official. The American economy is in recession. The S&P 500 index- a broad-based thermometer of the health of American corporations- has declined almost 50% in the past 18 months.

stockmarketThe volatility of the stock market in the current recession has touched the majority of households. Investing in stocks was once the privilege of the rich, but today, many retirement plans, especially 401(k) plans, contain stock-based mutual funds and the values of these funds have dropped precipitously.

So why would anyone want to buy stocks right now? Surely, it’s time to tuck your money under your mattress and wait it out? Smart investors know better. They are using this time of market fear to pick up great values in stocks. The one thing that stock market performance has taught us over the past eighty years is that it always goes back up. Even in times of economic crisis (remember Black Monday?), the stock market always finds its bottom and begins its climb once again. Over time, the stock market has outperformed any other investment vehicle.

Finding which stocks are solid values and which ones are set to drop further can be challenging and will require some leg-work on your part. Look at your timeframe. The longer the time you have before you will need the money, the more risk you can take of a stock going down further in the short term. Look at the price of the stock in comparison to its net assets on the balance sheet. If the company liquidated tomorrow, would there be enough money to return to all of the investors? As stock market prices dive, there are more and more companies that are trading below their asset valuation. These companies provide good value as their price is supported by tangible assets. Also, stick with companies that have a solid track record of results and are less affected by recession than others. Companies like Wal-Mart and McDonalds will do well during a recession because consumers are trying to get more for their dollar.

Regardless of economic crises, there are always ways to solidify your investment portfolio and shopping for stock bargains is one of them.

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This entry was posted on Thursday, February 26, 2009 at 9:09 pm and is filed under Investing Strategies, Stock Market Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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